Posts Tagged ‘Bailout’

In 2008, the Swiss people had pay out massive sums to save the country’s largest bank from collapse due to the toxic assets it had foolishly amassed in the U.S.

The Government bought most of UBS, so that it was in effect nationalised. The Swiss National Bank granted it a large loan and created a “bad bank” into which the toxic assets were dumped. As a result, the Swiss people took on the sizeable risk that the bank would never recover and all their investment would go down the drain.

Yet in 2010, the Government was able to sell its share in the bank at a modest profit. Now UBS has almost repaid the loan from the National Bank, which moreover has agreed to the bank taking back all the assets dumped in the “bad bank.” These have regained considerable value as a result of the recovery of the U.S. housing market.

Neue Zuercher Zeitung worked out that what the people have earned through the substantial interest charged on the loan and the National Bank’s share of the profits on the resurrected toxic assets will by year-end reach 6.5 billion Swiss francs ($7 billion).

Since 2011, the Swiss National Bank also bought huge amounts of foreign currency to prevent the Swiss franc appreciating too much – it had firmed from 1.55 to the euro in 2008 to 1.05. It set a base of 1.20 and announced it would sell any amount of Swiss francs to prevent further appreciation. After nearly a year bumping along the floor, the currency has eased to 1.23, and so when the National Bank decides to mop up the Swiss francs, it will repurchase them at less than it sold them for.

Together with the profit on re-privatising the bank, this would take the earnings of the people in this affair to around 10 billion francs ($11 billion) or more.

So a bank bailout can be profitable, not just a drain on the people’s wealth for the benefit of reckless banks. Why has it worked out this way for Switzerland, while in other countries such as Spain, Portugal and Greece, bailouts caused investors to lose faith in the solvency of the governments themselves?

In Switzerland, public finances were solid, and so foreign investors never doubted the capability of the state to assume the bailout burden. Secondly, Swiss companies are geared to high-quality and precision goods, which are not particularly price-sensitive. A liberal policy on immigration enabled it to import highly-qualified labour to keep standards high.

Not rocket science, but a focus on prudence and quality which has paid off.